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Izza: [The many reforms] are not going to stop corporate failures because such is the nature of the market economy. Companies do not fail because of their auditors. (Photo by Shahrill Basri/The Edge)
IN recent years, a widely publicised spate of global financial scandals has caused an erosion of public trust in the audit process, with audit firms taking the brunt of criticism for failing to identify and expose company discrepancies.
Last Tuesday, the Financial Reporting Council, which oversees the UK’s arms of international auditing firms, issued Deloitte LLP a proposed regulatory penalty of £330,000 for “serious failings” in the reviewed audit of a listed company’s 2018 financial statements.
This follows earlier censure from the UK’s accounting regulator, which reportedly said audits performed by the big four accounting firms — Deloitte LLP, Ernst & Young LLP, Grant Thornton UK LLP and PricewaterhouseCoopers LLP — and smaller rivals failed to meet expectations after it investigated the firms’ audits.
Ongoing improvements to audit quality and professional scepticism notwithstanding, Institute of Chartered Accountants in England and Wales (ICAEW) global chief executive Michael Izza tells The Edge that it is management and directors who run a business — and “if a business fails to perform, it is principally those people who first and foremost have responsibility for the company’s going concern nature”.
“One of the positive things that has happened is that there’s now been a much more informed debate in many of those markets about why corporate failures happen and the role that everybody plays in it,” says Izza, pointing to the UK, Germany and South Africa, which have “suffered corporate collapses of an equal profile in spite of the many reforms introduced” in those nations.
“[The many reforms] are not going to stop corporate failures because such is the nature of the market economy. Companies do not fail because of their auditors,” Izza stresses.
To draw attention to economic crime, namely money laundering, which is among the world’s most devastating issues where illicit finance is concerned, ICAEW in collaboration with the UK’s tax, payments and customs authority (HMRC) produced a training film in the UK called All Too Familiar, highlighting “how easily an individual can enter into a money laundering situation by not asking the right questions”, Izza explains.
ICAEW has been exposing the film “as much as possible in recent months” to stoke conversations about the possibility of such events.
“If you are a member of an organised crime group, or someone who wants to legitimise your wealth, you will want lawyers and accountants to give you legitimacy by working with well-known names. Those people add a veneer of trust that a bank does.
“It’s quite attractive for a client to say, ‘We’ve got an opportunity, I need your help’. But you need to do the checks and look at the sources of firms,” he says of auditors’ requisite responsibility in identifying and refusing shady opportunities that arise.
“It is a challenging world [given] the many external factors that could cause a company to get into difficulty. Expecting an auditor to be able to see all of those [within a period of about two years], is tough,” Izza says.
To this end, he notes that many auditors in the UK have been resigning from audits or qualifying audit opinions where ethics are concerned.
“You might wonder why the resignations from audits. If you talk to a company about internal controls being inadequate in not taking various facets of financial reporting seriously and then not doing anything about it, it may be possible to live with that for a certain amount of time. But when there is a persistent resistance to change, [the auditor] will have to say, ‘It is not the right thing for us to continue’.”
What is not working, Izza emphasises, is the way that renowned and established accountancy firms are challenged for their stand when conflicts arise.
“This persists in a number of markets. Although the non-audit work that an auditor can do for their client is tiny and defined, people still [insist] auditors are only doing it for the [sake of the] consultancy work,” he says.
As it stands, Ernst & Young LLP (EY) had in early September announced an industry-first split — called Project Everest — of its auditing and consulting functions, which could radically transform the business model for accounting firms moving forward. The move still needs final approval from EY Partners, with a vote slated for later this year. As it stands, EY’s partners in China and Israel have rejected the proposed split, citing similar reasons that the split will not create benefits for the business environments in the respective nations.
“[EY’s split] continues to be a live debate. [EY] are the only people who are exploring it now. I don’t expect [its counterparts] to follow suit but if the experiment is successful, I’d expect others to consider it too,” Izza says.
Izza points out that besides improving methodologies in the audit process, the amount of technology that is now employed in modern audit is significant.
“The amount of data which has to first be extracted into useful information for audit purposes and then have an opinion expressed on it, is challenging. But this will get easier [with advancements in technology].
“Twenty years ago, you might have pulled out a sample of 200 and done your statistical sampling on that. If you ran an artificial intelligence (AI) programme today and it throws up a thousand odd transactions, that would be a fivefold increase, which is not necessarily making the audit process more streamlined. [Rather], it may actually be asking more questions. As a result, you need more people to deal with that,” Izza says.
He says the process, which is followed by auditors — who are “much more capable today than a decade ago” — expressing their opinions on the data, should result in better audits.
“[Soon], it won’t be an annual audit [but] some form of continuous auditing that takes place on the company’s systems. The technology to do this exists today but if, for example, auditors were looking at something and doing real-time monitoring of a company system and it throws up some anomalies or exceptions in a particular part of the world, I don’t think people will be waiting for the year-end audit to investigate that. [Investigations] will be done in real time,” Izza explains.
He explains that this will add to the confidence of investors and the wider body of stakeholders who rely on term audits.
Meanwhile, Izza shares that Malaysia may potentially be seen as a source of talent amid a shortage of accounting and finance professionals in the UK after the Covid-19 pandemic.
Accounting firms and finance departments “need more people than ever before, with thousands of foreign qualified accountants and auditors coming into the UK from around the world”, he reveals.
“Currently, there are just so many people leaving South Africa and coming to the UK, the US and other countries, leaving [the former] with a significant talent gap. We’re also drawing talents from countries like the Philippines, where the UK has never sought people from. I think Malaysia is potentially in a position whereby it will be seen as a source of talent, but that also means it may lose people.
“The good news is that Malaysian chartered accountants are highly valued. But the country’s employers have to do what is [necessary] to retain the ones they want to retain,” Izza says.
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